tv AEI Discussion Focuses on OPEC and Energy Policy CSPAN January 6, 2017 5:52pm-6:57pm EST
in neighborhoods and communities bank. . . spreading out word about inauguration.dc.gov and also the twitter account @inaug2017 for washington d.c. [inaudible conversations] >> house speaker said today donald trump won the election fair and square despite the conclusion that russia interfered in the election. the declassified report concluded vladimir putin ordered a widespread campaign to influence the election in favor of donald trump. you can read the report yourself by clicking on this link from our web site.
that is in the range they were hoping for in november summit is interesting to watch. have the chair in residence scholar from any eye with the energy department policies serving in the administration of the of lighthouse from the reagan administration and the special envoy for the energy affairs to the enhanced the bureau of it is the department of state is the focal point for energy diplomacy under his leadership from negotiations
offer what the agreement tells us and second, us sabotage model but the central topic is prospects for oil prices there are few points to be made by going straight forward it is unlikely to hold the production cut of 2 million barrels per day of roughly 2% of production, of the russian agreement of cutting 300,000 barrels per day i think is impossible to meet in march generally the opportunities to cut prices
is much greater than people tend to appreciate you could give them the standard 30 days credit with a higher quality bland, lighter crude for that benchmark price, but in reality even if that production agreement holds so it will leave road prices over time so with those assumptions to get the production increase on the order of 200,000 barrels per day of increase deficiencies in response from $35.
the fed funds rate in interest-rate hist the increase of demand for investment that i just mentioned to increase interest rates would the sensible model that is substitute -- can be substituted overtime with a compound interest rates drives the current prices of those resources down so as interest rates rise those pressures will be down word notwithstanding that opec action but the two ancillary topics, but the incentive
would be to increase production now to grab what they can and head for the airport to fly to their villa in switzerland but the fact that they have agreed by not quite 500,000 barrels as the opec agreement suggests there is of threat that is less serious than otherwise would be the case. if you look at the data on disruptions as a proportion of global output there has been a decline as a proportion of lowball put starting in the summer of 2012 through november this
year. and with that decline and disruption, we have observed the prices. i think it is reasonable to believe a market that has the effect of moralizing prices so it will be interesting to see if i am right the prices from the new cartel over time as increased production or by purchasing pence with those price decline with that disruption and the jury remains out on that.
>> good morning. thanks for having me at the e i am glad to be here. i should say my kids agreed with your assessment of my travel the last couple of years that is the problem with a global position but but the most thanks for the recognition the rule of energy in for policy and national security that has come into play over the last several years. i don't believe the creation of the energy bureau by senator lugar at the time then turning into a bureau, at was a late response to what was that
energy already played a major role in decision making by and other countries and we needed to recognize at and address that. when you walk into their room in the other side has a calculus you are not familiar with your understanding reporting into the general foreign policy equation, then you don't get the optimum results from that negotiation or interaction so that is why it stands on those iran sanctions or southeast asia or central america. i will look at the opec question. we have gone process in the oil market that is very different than the previous
100 years. we always had peaks and valleys and oil prices and i don't believe in it is the same as previous cycles and a couple of ways. as the similarities in the rhythm, but the differences of just like other sectors commences are no faster and more immediate in the oil industry is no different with the trans formative effect on the whale market. in the united states we went from 5,000 barrels to a peak in 2015.
the projection by eia was that the united states was going to grow another million. the next year. that was the 2014 projection, that we were going to increase another million. in fact what happened was we decreased by 1.2 million barrels a day from peak to valley. but that meant a number of things. one, the cartel's normal response is that if prices are too low, you increase -- you decrease production, and you have an immediate effect. or you fight it out or you let the producer, the latest producer -- united states, the most expensive producer -- you drive out. you say i've got reserves. i can ride out a 28, $35, $40 oil price and kill your industry because everybody's told me -- because i watch too much television and cnbc, and every expert has told me that the u.s. production of shale oil can only
be profitable at $80-$85 a barrel. that was common wisdom. as the prices were falling, don't try to catch a falling knife? in fact, everybody was trying to predict what the rate of the falling knife was and, therefore, said the price equal the level playing field for oil production in shale in the united states, that tipping point was $88. well -- $80. well, then it became ash doctor 5 or whatever number it was that day on tv. you watch people on tv say it's $85, $75, $65, because nobody with fathom the changes in the united states. the resiliency. the fact that we, in fact, declined a lot from 9.6 to 8.4 million barrels a day. but the resilience of production meant for to opec the u.s. wasn't going away, shale production wasn't going away.
so letting it ride low was not going to be the answer. i think the mistake that opec made and continues to make is trying to deal with the future based on the past only. and looking at what happens in the past and looking at the paradigms of the oil market in the past. it's all about market share and price and how do i navigate between my how long can i take a lower price in order to maintain my market share. well, here's where i think the reality actually is. in doha the decision was to freeze. doha fell apart, and it didn't happen. in algiers they made progress. and at the end of november, they got the cut. the cut was 1.2 million barrels a day. that was the agreed cut. now, let's break that down because it wasn't a cut. from the -- if you look at production levels at the doha meeting when they wanted a
freeze, they were roughly the same as the levels -- they were 1.4 million barrels below production levels in november 30 when opec made the decision. meaning as they were negotiating a cut, everybody ramped up production in opec, so we had a 1.4 million surge, and then we had a cut of 1.2 which brought us back, essentially, to the freeze levels of doha. but remember this, why did we have a discussion about freeze in doha? because we had an overplied market. -- oversupplied market. so if we're freezing production at an oversupplied market rate, we're still in an oversupplied market. so we had a rally. but here's where the 1.2 breaks down further. the 200,000 barrel a day iranian cut is just about 200,000 barrels above what they're producing today. so iran didn't cut. they agreed to cut the level of hoping what their production could rise to. so their production we think is
about 3, 4 and 6, opec says it's officially at 3, 4 and 7, and their cut was to a ceiling of 3.97. so the 1.2 million cut is actually a million cut roughly. now since october when this agreement was negotiated, the united states increased production by 300,000 barrels a day. so we're no longer at 8.4 million barrel a day low production, we're back up to 8.7. so that's 300 taken away from the cut. now libya is at 200 above or 150 from october, but from their low, they're rising. nigeria's increased about 150,000. and nigeria and libya are exempt from the deal. so here's what happened, a 1.2 -- which is really 1 -- just half of that cut is gone. it's already been replaced by new oil.
and here's where the mistake has dramatic consequences. because of this process what has happened? traders normally react to headlines. so oil price fluctuates by headline. so we announce a freeze, potential talks about a freeze, oil price goes up. when they got the cut, all the headlines were about how the cut's taking hold, big headlines, saudi arabia announces to their customers that they're going to have less oil. iraq does, etc. well, in the meantime, that means price went up to about $55 a barrel you said today, right? well, at 55 u.s. production's humming again. that's why we're at 8.7. you want something that i think should scare opec more than anything else? in 2014 we were producing 8.7 million barrels a day and rising, ultimately, to 9.6. 8.7 million.
to do that, we used 1600 rigs. today we're producing 8.7 million barrels a day in the united states, and we're using 525 rigs. that's a third. you know what that means? it means that when you have a free market versus a controlled market of oil in the united states as we do in the united states -- and we're the only ones that have it -- you get efficiencies when the price collapses. you don't get subsidies. you don't get government coming in and bailing you out. you get efficiencies. and everybody shares the suffering. the oil companies, the service companies, etc. but that means when the price rises again, the efficient is is are there so we can get to 8.7 million barrels a day with only 525 rigs. that means if we keep the prices at $55-$60 as opec, quote-unquote, hopes, then opec loses and the united states wins. because production will continue to rise because we have ability
to produce shale oil at $32 a barrel. in some formations, $40 in others, etc. so actually giving this window a cushion for american companies to increase production, that's a result of the opec decision. so the short-term gain of a few hundred million dollars a month in the increased price between, you know, if you calculate the loss of production gets erased. and when does it fall apart, to your point? it's when market share starts getting affected in the next couple years. we listed the ban. -- we lifted the ban. so at some point in these denomination -- >> give me the export ban. >> the export ban on crude oil. then all of a sudden countries are going to say, wait a minute, now i'm taking a low price and i'm -- it's a higher price, but only about $5 a barrel, and i'm going to lose market share? that's what i'm trying to explain. the u.s. national security is in
contrast to what opec wants to do, not because of oil prices. for me, the united states i want libya to produce and export as much oil as possible because the fragile gna, the government of national accord, in libya to take hold and to keep stability for that coalition of militias, i need money. and the only money in libya is out of oil. so if they can continue to increase exports and have revenue to pay soldiers and civil service and the public sector and spur investment, that's a good thing. so i want to encourage libya to continue. and that's why the war against daish in libya is going well in some parts, but specifically the part that allowed the pipeline to reopen and ports to reopen as it has. that's why they're up 200,000 barrels a day. that's why i think they're going to continue to rise. nigeria, you can't beat boko
haram if you do not have oil revenues. that's the heart that the pumps all vessels in knew jeer ya. so the -- nigeria. so that's our interest. if we want to liberate mosul and actually make it successful, who's going to pay for the rehabilitation of those areas that are being bombed to hell right now? those villages have to be rerebuilt. with what money? there is no money in iraq, guys, nothing. only oil. that's it. and how does kurdistan go back to growth? through oil. oil and gas. so it's in our interests that the united states for these countries to increase production. so it's not that i care about your cartel, you're not a cartel. i think it's inefficient and effective. that's beside the point. i actually have a foreign policy disagreement. so that's where i think there's a mismatch between understanding the long-term effects of the market that opec needs to face
and the changes versus what actually is happening in the market -- sorry for taking longer than i should have. >> on your point on that, i think it's quite a critical point. if you look at kind of the shift in the markets and also kind of the geopolitical imperatives for a state such as saudi arabia or iran or, take saudi arabia whether a higher -- whether a agreement holds or not -- whether or not the deputy crown prince's reforms go anywhere. and the point that he was reaching until starting in january as these austerity cuts begin to hit and with the recent oil price you have, you're allowed to have more budget room in the saudi budget which allows more constituency support from the deputy crown prince. one get on the broader -- it makes sense in the case of libya or nigeria, but in a state like saudi arabia, you look at iran as well, to achieve some of their own economic reforms and also have that buy-in, it strikes me that the imperatives that were needed to get some
more effectiveness of opec in terms of moving the market as you both have noted is increasingly becoming more and more difficult. which i think then presents its own kind of challenges probably to u.s. foreign policy objectives as well. but that's a -- [laughter] >> well, look, i'm not going to presume to make, to give advice to the saudi keepty crown prince. -- deputy crown prince. he understands his market and his country far better than i do, or than we do. i think the sooner that every member of opec and every oil producer understands that the tenets of the market have shifted and have changed and that using the tool kit of the 1990s and even the early 2000s is not going to work, the sooner that is absorbed, the better. i applaud the deputy crown
prince for having the willingness to put the effort and the work and the time into vision 2030 and to moving the country in that direction because that's exactly what i'm trying to hope that they -- what i hope they do. and that is reform the basics of the economy so that you're not having this total dependency on a commodity that you no longer have the same ability to control as you once did. and as the swing producer of the global oil market that they have been for the last several decades, that status is not there anymore. they are not the swing producer anymorement and i know -- anymore. and i know the rest of the world talks about it like they are, they're not. the swing producer of the new world is the united states and more importantly is the free market in the united states. how much is produced in the u.s. will not be determined by any individual. it will be determined by the
price. and we have 4,000 producers in the united states. they don't make decisions in unison. they make decisions based on their p and l, on their private equity shareholders or their stock price or how much to -- what price they hedged at. that's going to be -- and how, what negotiations they can get with halliburton, schlumberger, nov and all the others. that's where -- that's the swing producer. saudi arabia, i think the more -- look, there's some obvious steps they can do, one is stop burning your own oil for power generation. do that as soon as you possibly can because you should be selling that barrel at $55 on the market and not burning it for $2 in your own country. natural gas, because of the revolution in natural gas, natural gas is so cheap, there's no reason they should not be converting to importing natural gas despite the fact that it's a psychological, pride, all the other issues, that's what should
be done. renewable energy should have the ability to grow into that mix. there should be a diversification of their own internal energy market which will allow them to cut subsidies. and to your point, what happens with the local population, that's what will help you. yes, it means prices may rise at the turn from a couple of cents a gallon to something more market-based, but look, uae did it, and it's working. you've got to get to that economy that drives to investments in other places. >> in looking at your -- [inaudible] both have remarked about on opec has kind of the effectiveness of opec as a cartel and compared to with this new reality, is really -- are we seeing kind of to obituary of opec in the coming year or two? are we seeing this shift, because on the one hand there are the market shifts. on the other hand to, you can look at kind of the failure at times in doha when the deputy crown prince pulled the plug on the agreement.
and going towards now -- and then eventually kind of reaching an agreement from algiers and onwards. but the concession saudi arabia had to make to iran and also as well working with russia. is this a sign that opec's effectiveness as an organization has also been, is greatldiminished itself? >> well, as a footnote, i mean, opec has never really been a cartel in the classic sense of allocating production shares in order to minimize the aggregate cost of production. opec has always been one big guy, the saudis, and a bunch of little fish who kind of hang on for the ride. in that sense, given that saudi production and opec production are now a good deal smaller as a proportion of world production -- and it was the case even ten years ago in substantial part because of u.s. shale, the shale revolution and
with horizontal drilling in the u.s -- the ability of opec and the saudis in particular to prop prices up has been stably reduced. but -- substantially reduced. but it is still the case the saudis, by cutting prices, can affect -- by cutting production, can affect prices. back in the '80s when the saudis decided that their production level of 3.5 million barrels a day on production capacity i think it was 11 or 12 million barrels a day was simply unacceptable and they started pumping, prices fell from, what, $36 down to 11 or something. identify got to go back and look at numbers. it was something like that. but the ability of the saudis to engineer those kinds of shifts, i think, are dramatically reduced particularly given their need for revenues to buy social peace, etc.
i think i disagree a bit with amos about the advisability of burning $55 oil domestically. it doesn't strike me as entirely obvious that it is irrational for them to buy social peace but subsidizing the consumption of a wide range of consumer goods specifically given the potential problems with the shiites in the east, etc. although while i agree it'sst costly, it may not be irrational. i don't think opec -- it's always been very difficult for any cartel to preserve a cartel price unless they are propped up by government regulations, and opec is not. and it's always been difficult for to -- for opec to make price increases stick ever since the early 1970s when opec became
important. and i think, i think that ability has been reduced as you suggest in your question now, but i don't think it's zero. they can certainly affect prices but not as much as used to be the case. >> the kind of one area that i imagine you probably witnessed quite firsthand was the evolving russian/saudi understanding that i believe it was president putin who called the supreme leader and that there was a lot of direct moves as well by putin in terms of within his own, his own energy space in russia that do you see kind of the, this russian/saudi cooperation on energy continuing to be a theme? i think that there was a -- some of the typical thinking, i know some in washington of seeing purely the russian/saudi relationship based on other geopolitical factors, but it did show there is space to actually have cooperation and also some
incentives, and you also have qatar recently in their joint investments kind of, this a sign that russia, that the russian gcc kind of on the energy dimensions is going somewhere? or was this kind of a one-time kind of agreement? >> i don't think energy is -- i think often energy is not about energy, right? so when we read headlines about energy, a russia/saudi or russia/iranian conversations about the oil market, it's not about energy, you know, what is good for market policy. it's not a dissertation on free markets versus non. i think what it's about is russia is actually becoming closer and closer to becoming a opec-style country from its economic design. as the rest of the russian economy collapses and continues to collapse, what holds russia afloat is, are things that come
out of the ground, sominals, diamonds, oil, gas. and the military industrial complex. and then the money that's used for that to infuse into the economy. the rest of the russian economy is not exactly humming. in -- and, therefore, the dependency on what is direct oil revenues versus -- and plus indirect oil revenues, meaning revenues that come into the treasury of russia from things that are themselves financed by energy revenues -- that becomes a bigger and bigger part of the existence, the mere existence of the russian economy and ability to operate in the world. so there is, there's starting to be this more symbiotic seeing the world through an energy lens from the perspective of what can i afford to do. and i'm engaged in very expensive efforts, both saudi and russia, in my foreign policy. i need to make sure that my population, that the declining economy doesn't affect the population too much. so there's a lot of similarity
in facing the crisis. russia has also a secondary problem. they are -- they sit on enormous reserves but declining production threatening in coming years and the ability -- what the plan was to replace the natural declining production was through areas that are then became under sanctions. so the unconventional is under sanctions, and they could not -- they had to stop, right? the exxon discovery is not being produced, for example. so they're, so they have to -- they're facing how do i continue to afford this. and i think that's, that's part of the reason for the cooperation, was necessity. >> yeah, but let me restate the question, if i may. in the narrow context of the oil market, are russian incentives -- which are the same for all producers -- to cheat on an inclusive agreement because by increasing production and
cutting prices you can increase revenues and profits -- that's true for any given producer -- are those incentives greater, stronger or weaker than the ability of the putin regime to threaten given individual oil producers in western siberia? i mean, the effect of you cos apart from the humanitarian disaster is really quite reveal anything that regard. and the question is to the extent that putin decides that if entering into an agreement with the saudis is in his interest, can he enforce it domestically? i think that's -- >> i think the agreement he cut he can enforce, because he didn't really agree to anything. i mean, what did he agree to? cut the potential -- what they projected to be the increased production they won't increase as much. that was what, basically, what russia agreed to in the russia-opec agreement.
it's a fairly easy agreement to fulfill if they actually do -- if you look, if you actually believe that they were going to increase the amount that they were, which i am skeptical about, then, yes. they cut a little bit of what their projected growth was. but remember, this is a six month agreement. so if you do a little bit of your maintenance in the first two quarters of the year, you're pretty much free to do whatever you want in the second half of the year. and so he didn't agree to all that much. the ability to enforce it, i think, is total and complete if he wants to. i'm not convinced that he is going to put too much effort. i think the reaction from igor sechin in the early days of the agreement where he said publicly in istanbul at the world economic congress, world energy congress where he said publicly we will not come to an agreement with opec, we will not cut production, and then a few days -- the next day president putin in the same conference
said we will reach an agreement with opec, i think you see the fissures and disagreements there. .. >> >> a new administration whether it tears of that board enforces it it is more rhetorical but one position is the return to the market's in the pressures iranians are facing at home trying to deliver on
economic reform with iran stone whale sector maybe to redevelop but looking at that the uc iran producing in the foreseeable future? he mentioned the president of russian economy and what about the iranian economize? >> as someone who has spent a bunch of years in forcing the sanctions taking 2.5 million barrels per day down to 1 million barrels per day i answered a question i was asked by after the j. pcl way there was some skepticism but my
view is in it is pretty much too bullish and that they would increase 1 million but they increase the hundred 50,000 i think they will continue to increase production with a development of the field but we judge iran and iraq can similar economies for through our own halliburton ones -- once. you shouldn't down but that is not how lowercase in the fields and large parts of the world you produce as much as you can miss some chicken wire and a duct tape and that is why they can increase with excellent engineering capability they have never lost that.
from the smart engineering perspective they could continue as the winner on the opec deal because they could increase production and they think the challenge down the road is to turn these into contracts but what has held back with jpcoa is to give the consensus position with of more reform oriented what type of contract to allow. if they cannot get to that point that western companies can except in a new environment then you will see the kind of growth and
iran. they have room to grow before they reach that infusion of cash. they got what they needed out of the opec deal so what he do with that saudi iran relationship? in six months it could be renewed if they reach that quota by the end of the six months today agreed to stay with that number or they need another bob? >> we have about 15 minutes. >> talk about oil prices in the following way relating
to the u.s. and national interests. so discuss how high a oil prices are good and bad for national interest and to what degree can national policy makers take actions that correlate for what that market reality is? >> that makes it more political with the trump administration. >> it is hard to have a conversation some the government should let it go
as long as it doesn't go to the extremes when we lost 1.6 million barrels per day and panic ensued we were in in that week recovery that drove this right back into recession prices rose so fast when we have enormous amount of meetings so from the strategic petroleum reserve in a coordinated fashion with the iea and had conversations with what their intentions were the star is increasing production but that is a very extreme level that changes the of market
obviously opec tried major intervention when prices dipped into the single digits will we ever see $20 oil again? that is the same question from a different perspective it is hard to say what is it is high? ken is the economy is so diversified if you are a service company but if you are an employee that has to do layoffs think of the towns and north dakota to build clinics and hospitals that did not exist before and prices fall production falls so now all of those
employees are gone because there is no community there's a you have dynamics food prices go down the tests you have all of these petrochemicals and is high intensity outside of the extremes as far as foreign policy there is a lot of discussion as we coaster a long political environment of discussion on energy that had nothing to do with reality hillsides so we operate in one of the worst conversations i can think of because it is attached from anything to do with reality
if you talk about renewals you are perpetrating no more often fossil fuels and that is the dichotomy in reality it is insane. texases these allele leading stay also energy the being state also add nearly 40 percent of electricity power generation from wind this is where we are going a much more urd diversified economy that the policy will have any effect to rollback the regulations but i think
with they are told will be the impact is far from reality:dining - - dying because of regulation but for the same reasons we don't have vcrs or of shell gas revolution to displace coal we saw all whole new coal power plant retirements >> key and believe if we trim the subsidies. >> it is much more gas people want coal to combat the also with cheaper natural gas but there is the problem with the math as well with lower emissions you cannot before racking
the then celebrating the reduction of coal because they go to gather. >> my point is that both sides the left and the right demagogue to the extremes but in reality and energy policy of how much policy could be affected a don't think very much people can take those leases. because as long as we have $55 a barrel you will munsey lot of drilling not because of ideology but it there is some they can do on policy but not this much that they can effect.
>> the one to ask you about the failed state model what will the u.s. do and those have then devastated so now they are desperate selling uranium to north koreans? to say i was involved before it was discovered. when you say their resorting to desperate measures it seems that what you talk about or boko haram or other
actors it is deplorable the u.s. is neglecting the region to hope that people will go way. they will not go away, . >> is a great question i agree with some of what you said but here is where we have to match the different issues. one is governance it is the government's resource curse because norway does not have resource cursed because uses its resources. but stretch this out all the way to cameron. the problem is we have the bad governance with no savings in and they get
together to say it is a crisis. are you kidding me you have five vendors 600 million sitting in reserves. i minnesota crisis. not you. you try to cut production so what hast to happen we tried it is very hard to cut into each country to say change the entire dynamics we try that and putting in resources but it is difficult but on the security side average concerned about the fact you have a copycat to spread around. so we look at how we can do that but i greet it does not change from $55 a barrel we
will have social unrest by the end of 2017. we will return to civil war in countries around the world. i agreed. i believe that. do not ignore it. i worry about and goal of. -- angola because it is the triple whammy of prices and the investment and then employ fewer people because the output is less and that is the danger if there is a social contract between the nine democratic regimes and the people that i have to accept your regime but at
least my day-to-day life but the first thing that the money goes from oil production is investment of infrastructure if this season is upon the road it does not be billed to the school list on electrification rate is not there. some now i have the bad regime without the basic services. my national interest is not about the economy but this is a very delicate balance i do not believe in the government's controlling the edward -- the oil prices but i did a terrible job and now if this continues to have an
impact on these because of the u.s. production shoots up to artificially increase the oil will have a much faster increase under a normal market conditions in which means the boom one year from now and the countries that you talk about go right back to the crisis is the panic of that decision to undermine and accelerate of boom and bust process that is my concern. we don't measure oil prices based on the date today's prices look at an annual basis of a two-year stretch
so to what extent to what extent does that increase or decrease the dynamics? >> i am just guarding a paper on this topic on supply disruptions and around 2010 or 2008. with the incentive of to push up the prices that is a standard result and those that we run across. to have a market for disruptions with the bob
pipelines and to prop up the prices. into measured the effect. >> and with the supply disruption setter not simply a pipeline that needs to be shut down for a while. and is impossible to italy eve there is not the decentralized market for that. to engage in this activity it cannot be o. there must be something i
the result is it went from weeks today's. and done must few bomb that pops station which is a much more significant event in you just don't even have to bomb it. so i actually see those bombings of the above-ground pipeline much more localized grievances writer like what the government is doing there is concern of the gas pipeline in turkey's though